Happiness, equality and the search for economic growth

Over the past three decades incomes have been stagnating – so it is not more growth we want, but more equality

Harbour scene, Suva, Fiji. Great inequality makes us hungrier for goods than we would otherwise be, by constantly reminding us that we have less than the next person. Photograph: Thomas Cockrem / Alamy/Alamy

The king of Bhutan wants to make us all happier. Governments, he says, should aim to maximise their people's gross national happiness rather than their Gross National Product. Does this new emphasis on happiness represent a shift or just a passing fad?

It is easy to see why governments should de-emphasise economic growth when it is proving so elusive. The eurozone is not expected to grow at all this year. The British economy is contracting. Greece's economy has been shrinking for years. Even China is expected to slow down. Why not give up growth and enjoy what we have?

No doubt this mood will pass when growth revives, as it is bound to. Nevertheless, a deeper shift in attitude towards growth has occurred, which is likely to make it a less important lodestar in the future – especially in rich countries.

The first factor to undermine the pursuit of growth was concern about its sustainability. Can we continue growing at the old rate without endangering our future?

When people started talking about the "natural" limits to growth in the 1970s, they meant the impending exhaustion of food and non-renewable natural resources. Recently the debate has shifted to carbon emissions. As the Stern Review of 2006 emphasised, we must sacrifice some growth today to ensure we don't all fry tomorrow.

Curiously, the one taboo area in this discussion is population. The fewer people there are, the less risk we face of heating up the planet. But, instead of accepting the natural decline in their populations, rich-country governments absorb more and more people to hold down wages and thereby grow faster.

A more recent concern focuses on the disappointing results of growth. It is increasingly understood that growth does not necessarily increase our sense of wellbeing. So why continue to grow?

The groundwork for this question was laid some time ago. In 1974, the economist Robert Easterlin published a famous paper, Does Economic Growth Improve the Human Lot? Some Empirical Evidence. After correlating per capita income and self-reported happiness levels across a number of countries, he reached a startling conclusion: probably not.

Above a rather low level of income (enough to satisfy basic needs), Easterlin found no correlation between happiness and GNP per head. In other words, GNP is a poor measure of life satisfaction.

That finding reinforced efforts to devise alternative indexes. In 1972, two economists, William Nordhaus and James Tobin, introduced a measure that they called "net economic welfare", obtained by deducting from GNP "bad" outputs, like pollution, and adding non-market activities, like leisure. They showed that a society with more leisure and less work could have as much welfare as one with more work – and therefore more GNP – and less leisure.

More recent metrics have tried to incorporate a wider range of "quality of life" indicators. The trouble is that you can measure quantity of stuff, but not quality of life. How one combines quantity and quality in some index of "life satisfaction" is a matter of morals rather than economics, so it is not surprising that most economists stick to their quantitative measures of "welfare".

But another finding has also started to influence the current debate on growth: poor people within a country are less happy than rich people. In other words, above a low level of sufficiency, people's happiness levels are determined much less by their absolute income than by their income relative to some reference group. We constantly compare our lot with that of others, feeling either superior or inferior, whatever our income level; well-being depends more on how the fruits of growth are distributed than on their absolute amount.

Put another way, what matters for life satisfaction is the growth not of mean income but of median income – the income of the typical person. Consider a population of 10 people (say, a factory) in which the managing director earns $150,000 (£93,000) a year and the other nine, all workers, earn $10,000 each. The mean average of their incomes is $25,000, but 90% earn $10,000. With this kind of income distribution, it would be surprising if growth increased the typical person's sense of well-being.

That is not an idle example. In rich societies over the last three decades, mean incomes have been rising steadily, but typical incomes have been stagnating or even falling. In other words, a minority – a very small minority in countries like the US and Britain – has captured most of the gains of growth. In such cases, it is not more growth that we want, but more equality.

More equality would not only produce the contentment that flows from more security and better health, but also the satisfaction that flows from having more leisure, more time with family and friends, more respect from one's fellows, and more lifestyle choices. Great inequality makes us hungrier for goods than we would otherwise be, by constantly reminding us that we have less than the next person. We live in a pushy society with turbo-charged fathers and "tiger" mothers, constantly goading themselves and their children to "get ahead".

The 19th-century philosopher John Stuart Mill had a more civilised view:

"I confess I am not charmed with the ideal of life held out by those who think … that the trampling, crushing, elbowing, and treading on each other's heels, which form the existing type of social life, are the most desirable lot of human kind … The best state for human nature is that in which, while no one is poor, no one desires to be richer, nor has any reason to fear being thrust back, by the efforts of others to push themselves forward."

That lesson has been lost on most economists today, but not on the king of Bhutan – or on the many people who have come to recognise the limits of quantifiable wealth.